We keep seeing reports in the mainstream media suggesting that Chinese gold demand is slipping away, but continuing strong gold withdrawal figures from the Shanghai Gold Exchange (SGE) seem to contradict these reports. While, as we have reported before, there are many doubts expressed as to whether SGE withdrawals are actually equivalent to Chinese consumer demand, there is no doubt that they do represent the underlying consumption situation.

Hong Kong-based Philip Klapwijk, the former executive chairman of GFMS prior to its acquisition by Thomson Reuters, did explain some of the discrepancies between the mainstream analysts’ Chinese consumption figures and SGE withdrawals (which differed last year by around 1,000 tonnes) as unrecorded cross border gold movement from mainland China into Hong Kong (technically illegal) in a presentation to the Bloomberg Precious Metals Forum a week ago (See – Chinese do export gold – to Hong Kong: Klapwijk), but he also noted that due to a clampdown by authorities this amount had ‘fallen off a cliff’ so far this year, which raises the question as to where all this gold being withdrawn from the SGE is going if it is not being technically ‘consumed’ in the mainland, or being ‘exported’ to Hong Kong.

The latest figure for SGE withdrawals, announced Friday, is for 42 tonnes for the week ended May 22, bringing the total so far this year to 945 tonnes in only 20 weeks. The levels are actually high for the time of year, which is usually a low period for SGE gold movements. Thus average weekly withdrawals so far this year have amounted to over 47 tonnes. While this includes the relatively high demand levels up to the Chinese New Year, it should also be recognised that the final four months of the calendar year also tend to see very high SGE withdrawal numbers.

So it is certainly conceivable, should the current high demand levels continue anywhere near the current volumes through the summer – and so far there’s been no sign that they may be easing – and there is the usual pick-up from September onwards, SGE withdrawals this year could well match, or exceed those of the record 2013 year when the total came to over 2,200 tonnes (representing an average of just over 42 tonnes a week).

With Indian demand imports expected to exceed 1,000 tonnes this year – more if one includes smuggled metal which still appears to be running at a high rate – gold flows into the two Asian giants are continuing unabated. Where the big unknown comes in now is what China intends to do next. We see tensions rising between China and the US over the latter’s increasing involvement in the political manoeuvrings over the South China Sea (which China feels is none of the US’s business) and possible further tensions arising from any US opposition to the further growth of the Chinese yuan’s influence as a globally traded currency, there is a prediction in some quarters that China is planning to wrest control of the global gold benchmark pricing system away from London with a launch of a Shanghai ‘gold fix’ later this year. And if the yuan is accepted as a part of the IMF’s SDR currency basket then it will be all-change in the gold market from the beginning of 2016 with China becoming the dominant influence.

This may well be a prediction too far. But it is fairly safe to say that China, and some of its allies – notably Russia – are moving towards a situation where they would like gold to play a regenerated role in the global monetary system and world trade.  This is so counter to most Western economic thought that when a mainstream analyst suggests only that we should think about the possibility that China might be moving towards some kind of gold backing for its currency (not necessarily a gold standard in the old sense with full currency backing by the yellow metal), he is almost universally ridiculed by the economic establishment. (See: Will China go for a gold standard? The jury is out!) – yet ‘thinking outside the box’ and very rapid implementation of new ideas is what the Chinese establishment is particularly good at. You just can’t write off the possibility that the Asian Dragon might come up with some kind of radical currency move that runs counter to accepted western economic thought. It certainly has sufficient Forex reserves to implement some kind of move which might have an adverse effect on the dollar. At the moment there is something of an economic truce between the world’s two superpowers, but the US needs to be careful how it proceeds with protecting the dollar’s global position at the expense of China. If you kick a dragon you’re likely to get burnt!